In the world of ESG investing, the environmental (‘E’) and governance (‘G’) issues facing companies have often taken centre stage, with social concerns (‘S’) receiving much less attention. This is partly because they are viewed as harder to define and measure, and due to the lack of a standard framework for measuring a company’s social responsibility efforts.

While the United Nations’ Sustainable Development Goals (UN SDGs) provide some interesting perspectives and guidance, there is not yet an agreed framework. As a result, many companies tend to cherry pick the social metrics they report on.

However, this does not mean that social issues do not pose risks to companies and should remain a secondary priority. Social metrics and practices are key to a company’s sustainable operations, yet upholding human rights and responsible value chains seem to be slipping down the Board agenda. “Bluewashing”¹ is also on the rise, this is when an organisation overstates its commitments to responsible social practices.

The meaning and relevance of ‘S’

The S in ESG stands for Social, and it refers to an organisation’s ability to meet the needs of its stakeholders, including employees, customers, suppliers, and local communities, and ensuring that social justice, equity, and fundamental human rights are upheld.

Over the last decade, investors’ understanding of both environmental and governance indicators and their materiality has improved to the extent that these are now integrated into their risk analysis and screening. However, social performance considerations have often been dismissed as either immaterial or of a lesser priority because the perception is that they present a lower risk to revenue streams or are less likely to be subject to regulatory actions or punitive measures.

This is drastically changing now, as persistent inequalities and the urgent need for a just transition to a more sustainable economy only strengthen the case for measuring and reporting both on risks and impacts on society and the environment, either voluntarily or as part of regulatory requirements.

Reporting against the ‘S’: the Social Taxonomy and CSRD

Europe seems to be leading the efforts in terms of standardising social metrics through the creation of a Social Taxonomy.  While still under development, the EU Social Taxonomy would aim to set out a list of socially sustainable activities with a similar structure to the current EU environmental legislation on sustainable finance and sustainable governance, better known as the EU Taxonomy.

This potentially new social reporting tool will aim to achieve three goals: decent work, adequate living standards, and inclusive and sustainable communities and societies. Each of these objectives is targeted at specific stakeholder groups (employees, consumers and/or communities) and aligned to the UN SDGs, with the target to standardise certain key performance indicators (KPIs) for companies through its objectives and sub-objectives.

However, while draft legislation was published in February 2022, the regulatory dossier is currently on the backburner as the focus on the ‘E’ has accelerated in Europe due to the need to be energy self-sufficient in renewables, the importance of which was made clear with the onset of the Russian-Ukraine crisis.

Also, from 2024 onwards, the Corporate Sustainability Reporting Directive (CSRD) will require companies to report under a wide range of ESG impacts in the short, medium, and long term. This includes a comprehensive analysis of the environmental and social effects of their activities through their supply chains, which is a key area where company social disclosure is frequently lacking and will surely drive real transformation.

Although the final form of an upcoming social framework remains to be seen, social issues remaining unaddressed pose risks to companies.  CSRD provides a first a tool that allows for clear and consistent reporting on social performance, enabling better comparison on companies’ activities. It should also be seen as an opportunity for ambitious companies to conduct improved due diligence and improve their social impacts along the entirety of their value chain – both upstream and downstream. This will set them on a long-term, value creation path, addressing and mitigating sustainability risks rather than reacting to them.

If you would like find out more about how you could better measure and report on the S in ESG please contact Naomi Hawkins, Head of Business Development. 

(1): https://www.humanrights.unsw.edu.au/research/commentary/explainer-what-is-greenwashing-bluewashing